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It is time for another part of our discovering Japan theme as we travel to Nagoya, where Governor Kuroda of the Bank of Japan was talking earlier today. Let us open with some good news.

The real GDP has been on an increasing trend, albeit with fluctuations, and the output gap — which shows the utilization of capital and labor — widened within positive territory from late 2016, for seven consecutive quarters through the April-June quarter of 2018 . Under such circumstances, the duration of the current
economic recovery phase, which began in December 2012, is likely to have reached 69 consecutive months this August. If this recovery continues, its duration in January next year will exceed the longest post-war recovery phase of 73 months.

So reasons to be cheerful part one, and below we get part two, but as you can see part three is a disappointment.

In the Outlook Report released last week, the real GDP growth rate for fiscal 2018 is projected to be 1.4 percent, and this is clearly above Japan’s potential growth rate, which is estimated to be in the range of 0.5-1.0 percent. As for fiscal 2019 and 2020, the real GDP growth rates are both projected to be 0.8 percent.

Economics gets called the dismal science but at the moment central bankers are trying to under perform that with the UK having a growth “speed limit” of 1.5% and the ECB saying something similar. The Bank of Japan is even more downbeat which is partly related to the demographics of both an ageing and declining population. This is partly because the previous foundation of their Ivory Towers called the output gap has failed so badly in the credit crunch era but the more eagle-eyed amongst you will have noted a reference to it above. How is that going?

The Output Gap

It is “boom,boom,boom” according to the Black-Eyed Peas and the emphasis is mine.

In the labor market, the active job openings-to-applicants ratio has been at a high level that exceeds the peak of the bubble period, and the unemployment rate has declined to around 2.5 percent. The number of employees has registered a year-on-year rate of increase of around 2 percent, and total cash earnings per employee have risen moderately but steadily.

As you can see the Japanese output gap is already struggling as we are apparently beyond bubbilicious in terms of demand but wage growth is only moderate. What about inflation?

The year-on-year rate of change in the consumer price index (CPI) has continued to show relatively weak developments compared to the economic expansion and the labor market tightening, and that excluding fresh food
and energy prices has been at around 0.5 percent.

In fact after deploying so much effort Governor Kuroda abandons his favourite measure for a higher one.

The year-on-year rate of increase in the CPI (all items less fresh food) has continued to accelerate, albeit with fluctuations. Although there is still a long way to go to achieve the price stability target of 2 percent, the year-on-year rate of change recently has risen to around 1 percent, which is about half the target .

Actually the state of play here is as strong of a critique of the original claims about QE as we have as according to the central bankers it would raise inflation. Whilst it has created asset price inflation there has been a lack of consumer inflation except in places where currencies have fallen, and in Japan not even much of that. Indeed whilst I would welcome the development below Governor Kuroda will be crying into his glass of sake.

What lies behind this likely is that people’s tolerance of price rises has decreased.

Monetary Policy

We have found something which has given the Bank of Japan food for thought. Output gap failure? Rigging so many markets? Impact on individual Japanese? Of course not! It is worries about the banks.

The Bank fully recognizes that, by continuing such monetary easing, financial institutions’
strength will be cumulatively affected by low profitability, mainly through a decrease in
their lending margins, and that it could have an impact on financial system stability as well
as the functioning of financial intermediation.

This is a little mind-boggling as we note that policies which were instituted to help the banks are now being described as hurting them. This is because the banks did not have to change and pretty much carried on as before knowing that they are too big to be allowed to fail. Also I though central banks and regulators were on the case these days but apparently not.

That is, if financial institutions become more active in risk taking to secure profits amid the low interest rate environment and severe competition continuing, the financial system could destabilize should large negative shocks actually occur in the future.

This if we think about it is quite a confession of failure. We have already looked at how economic policy has been directed to suit the banks and in Japan’ case that has continued for nearly thirty years now. Next we seem to have a loss of faith in the new regulations which were supposed to fix this. Finally we have something of a confession that it could all happen again!

If we looked wider we do see some context for example in the way that the European bank stress tests were widely ignored over the weekend. I think that those interested have already voted via bank share prices in 2018, but we do see something rather familiar via @jeuasommenulle.

While everybody is having fun bashing EU banks and pointing out that market volatility on Italian govies will hurt bank capital… the US quietly removes rules that make market volatility impact capital in the 1st place

Yep back to mark to model rather than mark to market. Just like last time in fact, what could go wrong?

You and I get told what to do but the banks get a different message.

encourage them to take concrete actions as necessary.

The Tokyo Whale

The Bank of Japan has been living up to its reputation and moniker.

The Bank of Japan bought a monthly record of 870 billion yen ($7.68 billion) in exchange-traded funds in October, apparently aiming to support equities as investors turned bearish amid sell-offs in U.S. shares. ( Nikkei Asian Review)

Back on the 23rd of October I pointed about I was bemused by the Japanese owned Financial Times report on a “stealth taper”.

The central bank has become more flexible on its annual ETF purchase quota of around 6 trillion yen — a mark it will likely exceed by year-end at the current pace. ( NAR)

Another Japanese style development comes from this.

But its large-scale purchases under Gov. Haruhiko Kuroda’s massive monetary easing program were criticized for propping up share prices for a limited range of companies and distorting the market.

To which the classically Japanese response is of course to rig even more of them.

This prompted the BOJ to decide this July to spread out buying more widely.

Comment

The comments about an interest-rate hike from Japan are mostly driven by this from today’s speech.

Japan’s economic activity and prices are no longer in a situation where decisively implementing a large-scale policy to overcome deflation was judged as the most appropriate policy conduct, as was the case before.

The problem with such rhetoric comes from the section about as we note that Bank of Japan bought a record amount of equities via ETFs in October. Also this summer it give a specific pronouncement on this subject which was repeated today.

Specifically, the Bank publicly made clear to “maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”

Indeed he even hints at my “To Infinity! And Beyond!” theme.

it has become necessary to persistently continue with powerful monetary easing while considering both the positive effects and side effects if monetary policy in a balanced manner.

So they will continue the side effects but carry on regardless unless of course the side effects become an even bigger problem for the banks. The status quo continues to play out.

Whatever you want
Whatever you like
Whatever you say
You pay your money
You take your choice
Whatever you need
Whatever you use
Whatever you win
Whatever you lose.

Podcasts

I plan to begin a new series of weekly podcasts this Friday.If anyone has any thoughts or suggestions please let me know.

This morning has brought fascinating news confirming one of the main themes of this website and indeed my work. I regularly point out that there are more than a few problems with converting economic theory to practical measurement. It is also true that economic statistics are quoted in the media and elsewhere to an accuracy they simply do not possess of which the clearest example is the quoting of quarterly economic growth or GDP ( Gross Domestic Product) figures to an accuracy of 0.1%. Strangely the official statisticians in my country the UK seem to want to exacerbate this problem by producing monthly GDP reports when there are such issues with the quarterly ones. After all the initial or preliminary quarterly report only contains around 40% of the final data set so producing monthly reports seems more like flying on a wing and a prayer to me.

However there is a positive here which is work from the Economic Statistics Centre of Excellence has shown a way we can do better and on that road we find that as we have suspected on here the group Imagination were rather prescient about some official data.

Could it be that it’s just an illusion
Putting me back in all this confusion
Could it be that it’s just an illusion now?

The Telecoms Problem

The issue here is summed up quite simply by the sentence below.

The telecommunications services industry has experienced very large technological progress in the past decades, as measured by technological output metrics. However, the industry’s economic output statistics do not appear to reflect this.

As that sinks in we realise that there is quite a problem here. After all if there is an area where there has been technological progress telecommunications is where it has been. I realise that I am spoilt being a Londoner in terms of signal strength but for example pretty much everywhere you these days there are people connecting online via their smartphones. Or in another form the Uber business model pretty much relies on people being connected online and my part of town became for a while like a science fiction film with so many people staring at phones checking where their taxi had got to. Another variation of this has been increases in broadband speeds and falls in price as I recall being a customer of AOL Silver providing a grand speed of 256k! Hard to believe now that I was paying £17 a month for that isn’t it?

There is a business context to this as at the turn of the century I was looking at having some trading systems connected to my flat. It seems like another universe now that BT wanted £6000 to connect up and at least £1000 a month for something which now would cost say £50 a month and probably less.

Yet as the authors of the paper point out this is how it has been officially recorded.

Between 2010 and 2015, for example, data usage in the UK expanded by around 900% but real Gross Value Added (GVA) for the industry fell by 4%.

Gross Domestic Product

It looks as though this has been underestimated over the period in question.

there has been an exponential growth in the quantity of data transmitted via telecommunications networks (both fibre and wireless) in recent years. Intuitively, this huge gain in achieved data transmission performance at the same or declining cost should represent a significant gain in output, irrespective of the content transmitted by the data, or the price charged for this content.

There are two issues here. Firstly the explicit one which is that output from this sector has been underestimated and thus GDP will be higher once it is properly recalculated. Next is the implicit one that we need to check other sectors as whilst they may not be affected as much there may be impacts.

Inflation

This is the crux of the matter. Here we find that two of my themes get backing and the major one that economic advancement can come from lower prices has a shattering effect on central banking methodology. Advancement via lower prices makes a 2% inflation target look out of touch and those arguing for an increase to be somewhere far far away, to coin a phrase from reality. Next there is the issue of deflators, which is how inflation is measured for GDP, and it is something of a mess. The particular issue here is that GDP in this sector has been too low because recorded telecoms inflation has been too high. In fact way too high.

Our findings indicate that the current deflator is upward biased and that telecommunications services
prices could have fallen between 35% and 90% between 2010 and 2015, considerably more than the current deflator,

This is a specific problem but in fact there are more than a few issues with the deflators in the national accounts. The worst sector is the one for government which seems to me to be an outright fantasy. This is not a criticism of the individual statisticians who no doubt do their best but an observation that in reality we have no real way of measuring it mostly because we have no output measure for more than a few government sectors.

Productivity

I have regularly argued that it is very likely we have miss measured productivity and therefore the crisis will to some extent fade away. We have today seen at least a partial confirmation of this highlighted by this from the Financial Times last March.

Telecoms accounts for only 1.8 per cent of the economy but official data suggest it is responsible for nearly a fifth of the economy-wide productivity slowdown.

It now appears that the productivity problem in this sector was because output was recorded incorrectly ( too low) because inflation via the deflators was too high.

If we go back to the peak headlines where for example the Bank of England argued we were some 19% below where we would have been projecting pre crisis trends we are left wondering how much is due to miss measurement?

Comment

There is a lot to consider here as we see yet again that our economic concepts may be fine in theory but are much more difficult in practice. This is especially true in the services sector where the output is usually intangible as opposed to the tangible output of the goods sector. That is especially awkward when the services sector is heading for 4/5 ths of your economic output as it is in the UK. The analysis in the paper referred too highlights this in one simple section which shows that in the period in question telecoms revenues fell by 10% which in essence led to the falling output and productivity conclusion in UK GDP. But data transmission rose by a factor of ten strongly challenging the falling output conclusion. Another way of looking at that is the existence of a wide range of business and services such as WhatsApp or Kik.

It is a mistake I think to just take the data numbers as issues such as allowing for quality and what is called hedonics have problems. I still recall being at a Public Meeting on the subject of inflation measurement and a questioner from the floor pointed out that his grandmother particularly liked one apple ( Cox’s Pippin) and if they were not available would not buy apples as opposed to in economic theory where she would automatically switch to a different variety. Thus I would agree with the research paper that the middle way of modifying the inflation measure by 35% rather than 90% is sensible but it comes with a crucial kicker. This is that whilst the numbers are now more realistic and should be much more realistic we should have a slice of humble pie and realise that they are if you will forgive the capitals an ESTIMATE as opposed to the holy grail.

The subject of safe havens is something that comes to mind as one considers the situation concerning North Korea. An unhinged leader combined with nuclear weapons and intercontinental ballistic missile technology does not make for a stable mix and of course there is Kim Jong-Un to consider as well. Mind you Twitter took the news of a possible Korean H-Bomb very calmly yesterday as it was soon replaced in the headlines by Wayne Rooney’s difficulties and today events are led by a headline which could refer to North Korea but fortunately McStrike is in fact the first strike at MacDonald’s in the UK.

So let us consider an environment where risk is higher and maybe a lot higher. This poses an early issue as my time in derivative and particularly options markets taught me that we as humans are very bad at quantifying things to which we give a low probability. We are even worse when it is something we do not want to happen. Establishments magnify this issue as I recall the excellent work of the Nobel prize-winning physicist Richard Feynman on the NASA Challenger space shuttle disaster. He was part of the enquiry and was officially told that the odds were millions to one whereas when he interviewed individual engineers they told him that individual parts had a one in five hundred chance of failure. It turned out that the disaster was not a surprise as the surprise was that it had not happened before.

What does risk-off do now?

The Japanese Yen

Each time the rhetoric or a North Korean missile rises the Japanese Yen follows it. This felt especially odd when one of the missiles overflew Japan and tripped civil defence alarms as well as no doubt having the self-defence force scrambling. Also the rally to 109.60 this morning against the US Dollar will have steam coming out of the ears of the Bank of Japan on two counts. Firstly because a lower value for the Yen is part of Abenomics and secondly it will send equity markets lower ( 190 points on the Nikkei 225 index).Still the Bank of Japan will be able to occupy itself by buying yet more equities.

If we look deeper into Yen strength in risky times I note this from the IMF in November 2013.

since the mid-1990s, there have been 12 episodes where the yen has appreciated in nominal effective terms by 6 percent or more within one quarter and these coincided often with events outside Japan

The first point if we modify low to lower to bring it up to date gives us food for thought on what determines interest-rates. We are usually told domestic considerations but there is a correlation between strong trade positions and negative interest-rates for example. As to the foreign asset position then unlike its public-sector which has lots of debt Japan is in fact the largest creditor. From Reuters.

Japan’s net external assets rose to their second-highest amount on record at the end of fiscal 2016, driven by rising mergers and acquisitions overseas by firms and portfolio investment, the Finance Ministry said Friday.
The net value of assets held by the government, businesses and individuals stood at ¥349 trillion ($3.12 trillion) — just behind 2014’s record ¥363 trillion. It meant Japan remained the biggest creditor nation for the 26th straight year, the ministry said.

There is a twist though as you might think the Yen rallies because of the money beginning to be brought home but in fact according to the IMF not so.

In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows.

In essence it is expectations of a change rather than actual capital flows. I would imagine that the carry trade ( where foreign investors borrow in Yen) are a factor in this.

Swiss Franc

Many of the same factors are at play here which is why in the early days of this website I labelled the Yen and Swiss Franc as the “Currency Twins”. We can reel off negative interest-rates, trade, carry trade and so on including with a wry smile that official policy is in the opposite direction! There are two main differences the first is that there tend to be actual inflows into Swiss Francs. The second is the way that net private assets have been replaced by the Swiss National Bank. From a Working Paper from the Graduate Institute of Geneva

At the end of 2016, the Swiss net international investment position (NIIP, the value of foreign assets held by Swiss residents, net of liabilities of Swiss residents to foreign investors) reached 131 percent of GDP ……. The net international investment position of the private sector was thus close to balance in 2015, and only amounted to 24 percent of GDP at the end of 2016.

So we have seen something of a socialisation of Switzerland’s net investment position. Does that matter? I suspect so but markets seem less worried as the Swissy has rallied against the US Dollar by 0.75% to 0.9574 today.

Euro

It is hard not to raise a wry smile at the articles saying the Euro is no longer a safe haven currency as we note its rise today! Here is Kathy Lien of Nasdaq from last week with an explainer of sorts.

In future my financial lexicon for these times will have negative interest-rates and large QE as part of my “hawkish” definition. Anyway as we note that it is the countries with ongoing types of QE who are the new apparent safe havens we are left mulling the chicken and egg conundrum. Being a funding currency in the global carry trade is another consistent factor.

US Dollar

So far the era of the military dollar seems to have ended. Maybe it awaits a proper test as in an actual war but considering the stakes I would rather not find out.

Comment

So we see that a potential factor in being a safe haven currency is for official policy to be for the currency to fall? Not quite true for the Euro at least explicitly although of course it used to be expected ( outside the Ivory Towers who still do) that negative interest-rates and QE weaken a currency. A side effect of the official effort is clearly that the QE and supply of money aids and abets those who wish to borrow in that currency and at times like this even if they do not actually reverse course markets price in that they might. The currency then sings along to “Jump” by Van Halen. You can turn the volume up to 11 Spinal Tap style if actual carry trade reversals happen.

Also there is the issue of what is a safe haven? In terms of Japan it is clearly not literal as it is in the likely firing line. We see that front-running expected trends remains the main player here as opposed to clear logical thinking. Also we see that another safe haven only flickers a bit these days as bond markets rally a bit but nothing like they used to That is another function of the QE era as how much more could they rise? Also I note that equity markets do not seem to fall that much as the FTSE 100 is off 10 points as I type this.

So a safe haven may simply be front-running? If so it means we need to dive even deeper in future as does this below for Switzerland show strength or potential weakness?

Specifically, assets held by Swiss residents abroad represent 671 percent of GDP, while claims by foreign investors on Switzerland amount to 541 percent of GDP. With this leverage, a movement in asset prices and exchange rates that affects more assets than liabilities has a sizable impact on the NIIP.

As we approach what in the UK is a Bank Holiday weekend many thoughts turn to the weekend’s sport and football in particular. News is increasingly dominated by the UK Premier League but of course there are strong European influences highlighted by yesterday’s Champions League draw and today’s Europa League one. The latter indicates a change as it replaced the UEFA Cup which had a fair bit of prestige back in the day as opposed to a league that many teams were not keen to be in although in recent times that appears to have switched again, That may of course simply be because Chelsea and Manchester United have won it as opposed to much poorer recent UK efforts in the Champions League.

If we move to the economics then the ever larger sums are having an impact and regular readers will be aware that I mull from time to time how much of this is inflation and how much genuine growth? From Deloittes.

In 2015/16 Premier League revenues rose to a record £3.6 billion. Each club generated more on average than the whole top division of 22 clubs did in total in 1991/92 and commercial revenues exceeded £1 billion for the first time in the league’s history.

It has been a heady mix of higher ticket prices and subscription TV fees which have been mostly inflationary and higher commercial revenues which I would suggest are growth. Oh and for those unaware the UK has split its subscription TV coverage so you need to pay 2 subscriptions now to get everything. Sneaky inflation I think especially as at least some of the European competitions was free to air albeit you might have to watch some advertisements.

The balance of payments issue is even more complex as we have the tap running into the sink via ever larger fees from overseas viewers of the Premiership but also a plug hole as we buy ever more foreign players. As to the wages we pay foreign players it is almost impossible to figure out how much will be spent here. I also note with a wry smile that the Premier League all time 11 just voted for on the BBC website had 8 British players. So we continually buy foreign players when the best ones were British all along? What of course we are seeing here is the influence of emotion and irrationality which strongly influences these matters. Also if 25 years the new all-time?

Is it Rational?

The Financial Times has published some research suggesting that the various transfer fees are rational.

Data analysis suggests sums spent on players are in proportion to resources available

Care is needed with something like that as if we look at other news the woman who has won that enormous sum on the US Lottery could easily massively overpay for things and say she has plenty left. In fact it is exactly the sort of argument used to justify any raging bubble and at that specific moment in time it is usually true, the catch is of course that time only seems to be suspended and moves on. First let us update the numbers which have soared again.

According to Deloitte, more than £1.17bn has been splashed out this summer by clubs in the Premier League, Europe’s wealthiest division, where they have combined revenues of roughly £4.5bn. Overall spending in this summer’s window has already breached the £1.16bn spent by English sides during the same period in 2016.

Okay but let me point out the missing number here which is the wages commitment which over time might not be far off as much again. As transfer fees rise clubs are keen to sign these players up for long contracts at high wages which is an ongoing annual burden. Also it is hard to know where to start with this below.

Neymar’s transfer is an outlier, with the Brazilian forward’s fee representing more than 40 per cent of PSG’s revenues of €521m. However, the French club believes the global superstar will enable it to secure higher income from future commercial and merchandising deals, as well as achieve better performances in European competition.

We may be about to get a lesson in how quickly an outlier becomes the norm! Maybe not too long if this from L’Equipe is any guide.

They are also offering what only a few months ago would have been an extraordinary sum for Phillipe Coutinho at Liverpool. We get a hint here at the inflation around because he was bought by Liverpool for £8.5 million according to the BBC and he has played really well so shall we say his price should be now treble or quadruple? I would be interested in reader’s thoughts as trying that sort of analysis has a lot of growth but also lashings of inflation. We also need the caveat that the media is not entirely reliable with its price estimates as rumour is dressed up as fact.

Bubbilicious

Apparently the numbers do work.

21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings……….21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings.

So current prices tell us that prices are statistically current? It is hard not to think of someone proclaiming Dutch Tulip prices were statistically based back in the day. Even if we suspend such thoughts the model as presented gives some rather odd results. For example Arsenal would presumably not have bought Lacazette if they had known he was about as likely to lose as win them points. Chelsea are certainly not users of the system as for Rudiger and Bakayoko it is apparently only a question of how many points they will cost them. Let’s face it any football fan would be able to figure out that Bonucci would improve pretty much any team he joined. Those who watched the woeful keepy-uppy skills of Paulinho at his Barcelona presentation may be scratching their heads at any scenario where he will improve them.

Oh and correct me if I am wrong but is this not simply another form of extend and pretend?

Tim Bridge, a senior manager at Deloitte’s sports business group, says: “Clubs do not account for a transfer all upfront, instead spreading the fee across the life of the contract, so a £30m to £40m revenue uplift in one year translates to £200m in transfer spend across a five-year period.”

They do of course have some income sources which may be fixed for this period but not all of them.

Comment

Can something which depends so much on emotion ever be fully rational? I doubt it. This does not mean that there have not been pockets of rationality such as past purchases of loss making UK Premiership clubs who later turned into money machines. In some cases this involved luck as the debt that the Glazers loaded on Manchester United should have both imploded and exploded after the credit crunch but of course the central banks stepped in. So they should perhaps raise a glass to Janet Yellen and Mario Draghi as they speak later at Jackson Hole. Actually in more ways than one because if I recall correctly the loans that were used by Real Madrid to buy Cristiano Ronaldo were used as collateral at the ECB.

Over my career I have seen so many statistical models suddenly collapse as the assumptions behind them disappear into a mathematical quicksand. So in essence here apparent rationality becomes something else or the modellers can sing along with both football fans and The Monkees.

Then I saw her face, now I’m a believer
Not a trace of doubt in my mind.
I’m in love, I’m a believer!
I couldn’t leave her if I tried.

Firstly let me open with my best wishes to those caught up in the terrible event at Westminster yesterday which is somewhere I pass through regularly. Let us then review some better economic news in a period where the UK statisticians overload particular days. If we go back to Tuesday where there was a panoply of inflation data there was also this about the public finances.

Public sector net borrowing (excluding public sector banks) decreased by £2.8 billion to £1.8 billion in February 2017, compared with February 2016; this is the lowest February borrowing since 2007.

I recall that the January numbers were also more positive and this led to this.

In January and February 2017, the government received £13.4 billion and £4.7 billion respectively in self-assessed Income Tax, giving a combined total of £18.1 billion. These represent the highest combined self-assessed Income Tax receipts on record (records begin in 1998).

So good news and other forms of revenue were good too.

Similarly, in January and February 2017, the government received £6.2 billion and £2.2 billion respectively in Capital Gains Tax, giving a combined total of £8.4 billion. These represent the highest combined Capital Gains Tax receipts on record (records begin in 1998).

It would seem that Capital Gains Tax is more significant than might be assumed. I guess the higher house prices ( it is paid on second homes and therefore buy to lets) and maybe profits from the equity market are driving this. I am surprised that the Bank of England has not been trumpeting this as part of its wealth effects, have they missed it?

Also the overall tax situation for the financial year so far has been strong.

In the current financial year-to-date, central government received £616.1 billion in income; including £465.6 billion in taxes. This was around 6% more than in the previous financial year-to-date.

There was a change to National Insurance rates but even allowing for that we are seeing a pretty good performance and ironically after the talk of extra spending and fiscal expansionism the numbers may well be telling a different story.

Over the same period, central government spent £638.1 billion; around 2% more than in the previous financial year-to-date.

With inflation rising that is of course less in real terms than it first appears and meant that we did better here.

Public sector net borrowing (excluding public sector banks) decreased by £19.9 billion to £47.8 billion in the current financial year-to-date (April 2016 to February 2017), compared with the same period in the previous financial year;

Retail Sales

There was good news as well in the February data for Retail Sales.

Estimates of the quantity bought in retail sales increased by 3.7% compared with February 2016 and increased by 1.4% compared with January 2017; this monthly growth is seen across all store types.

However the monthly numbers are erratic and the seasonal adjustment is unconvincing. February was partly so good because January was revised even lower. But the year on year comparison was strong.

In February 2017 compared with February 2016, all main retail sectors, except petrol stations saw an increase in the quantity bought (volume) while all sectors saw an increase in the amount spent (value). The largest contribution in both the quantity bought and amount spent came from non-store retailing.

However because of the week December and January data the trend remains for a fading of the year on year growth.

The underlying pattern as suggested by the 3 month on 3 month movement decreased by 1.4% for the second month in a row; the largest decrease since March 2010 and only the second fall since December 2013.

Actually we get a confirmation of some of the themes of this blog. For a start in something which central bankers and inflationistas will overlook higher inflation leads to lower consumption. The higher oil price has led to less petrol consumption.

the largest contribution came from petrol stations, where year-on-year average prices rose by 18.7%……..The underlying trend suggests that rising petrol prices in particular have had a negative effect on the overall quantity of goods bought over the last three months.

Over time I expect this to feed into retail sales as you see that prices are rising overall as the higher oil price feeds through.

Average store prices (including fuel) increased by 2.8% on the year, the largest growth since March 2012;

So sadly I expect the retail sales growth to fade away as higher inflation erodes real wages. Also whilst it is only one sector we have yet another inflation measure (2.8% here) running higher than the official one, how many do we need?

Royal Statistical Society

I am pleased that it has expressed its misgivings about the new UK inflation infrastructure in a letter to The Times today. Here are the main points.

For several years, the Royal Statistical Society (RSS) has been advocating the introduction of a proper household inflation index. We believe the answer lies in the proposed Household Costs Index (HCI) that is currently being developed by the Office for National Statistics, with expert input from some RSS members.
Paul Johnson is right that government should not be cynical in its use of different inflation measures. We would also argue, however, that the government should use the appropriate inflation index for the job at hand. CPIH makes sense as an index for economic policy matters (such as potentially interest rate setting by the Bank of England) but it is HCI that, once fully developed and proven, should be used for uprating purposes and for assessing real incomes in the UK.

Good for them! I have spent quite some time taking my arguments to the RSS and am pleased that the message is at least partly not only being received but also transmitted. My only quibble would be that CPIH results from national accounts methodology and not economic principles.

Ben Broadbent

Ben spoke at Imperial College earlier and as ever his Forward Guidance radar misfired.

We may already be seeing the impact of that squeeze on retail spending, which in real terms fell quite sharply around the turn of the year.

Some felt it was a hint for the 9:30 numbers but if it was Ben had misread them. He gives some more Forward Guidance by telling us the UK Pound £ may go up or down!

Either the currency market is too pessimistic, in which case sterling’s depreciation is likely to be reversed over time. Or it’s not, in which case the costs of exporting will eventually go up.

Actually after the last Forward Guidance debacle Ben has either completely lost the plot or has developed a sense of humour as whilst not in the speech this was being widely reported..

It’s quite possible we could see rates go up in the UK

Can see scenarios where BOE could raise rates ( h/t FXStreet )

Another issue is that Ben Broadbent seems to follow financial markets and assume they are correct. If you recall when I was on BBC Radio 4’s MoneyBox last September the ex-Bank of England economist Tony Yates repeated the same mantra. They seem to have forgotten that they should not be puppets they should have their own views.

Comment

This week has had a ying and yang to it on UK economic news. The public finance and retail sales numbers remain good but the Sword of Damocles already beginning to swing is higher inflation especially via its effect on real wages. This will affect retail sales as 2017 progresses and that will affect the public finances too albeit there are also gains for the latter. Yet the establishment continues with its objective of inflation measures that ignore as much inflation as possible. Does anybody actually believe this new Forward Guidance from the Bank of England? After all back in 2011 they ignored inflation which went above 5% with disastrous consequences for real wages.

One of the features of the credit crunch era in the UK has been the rise or growth if you prefer in the numbers of people who are self-employed. This has led to a debate as to whether it has been a voluntary choice or people have felt forced to do it or more likely a combination of the two. The overall effect from it has been to be one of the driving forces behind this recorded by the UK Office for National Statistics.

For September to November 2016, 74.5% of people aged from 16 to 64 were in work, the joint highest employment rate since comparable records began in 1971.

In terms of numbers the situation is as shown below.

self-employed people increased by 133,000 to 4.77 million (15.0% of all people in work)

If we start with the increase in latest figures we see that the rise in self-employment is only just shy of the rise in employees (144,000) . If we look back over the credit crunch era and start from the beginning of 2008 we see that self-employment has risen from 3.847 million to 4.775 million. Putting that another way the rise of 928,000 is some 44% of the overall rise in employment of 2,118,000. Thus the UK “jobs miracle” has seen self employment at the heart of it.

Putting it another way the numbers of self-employed look on their way to pass the numbers of people in public-sector employment.

There were 5.44 million people employed in the public sector for September 2016. This was: 12,000 more than for June 2016: 10,000 fewer than for a year earlier

So we may yet see a cross-over with the only issue being all the changes around how public-sector employment is defined and measured.

The sex issue

There is another quirk in the numbers which goes as follows. In relative terms men are more likely to be self-employed as in there are more than twice as many whereas total employment is only 13% higher. But in the credit crunch era the increase in female self-employment has been higher than the increase in male self-employment meaning that the proportionate increase is much higher. I would be interested in readers thoughts as to why there has been such a shift towards women and girls becoming self-employed?

Pay and wages

This is an issue because the official wages ( strictly average weekly earnings) data omits the self-employed entirely. Actually it also omits smaller businesses as the threshold last time I checked was 20 staff. This poses all sorts of problems especially as the number of selr-employed has been growing.

AWE is based solely on the Monthly Wages and Salaries Survey (MWSS), which covers employees working in businesses with 20 or more employees in all industrial sectors in Great Britain (an adjustment is made for smaller businesses).

Is adjustment the new word for imputed? Anyway this was all reviewed by someone who pops up on here from time to time which is Dr. Martin Weale who if you recall regularly flip-flopped when he was at the Bank of England. The lack of self-employment data did not seem to get a mention from the good Dr. who is now a fellow of the Office for National Statistics in a Yes Minister style move.

New Information

As we lack official data we need to dig and mine for what we can and the Royal Society for the encouragement of the Arts Manufactures and Commerce has been on the case. It gives us a bleak house style opening.

Bleak headlines such as ‘80% of self-employed people in Britain live in poverty’, and ‘Self-employment used to be the dream. Now it’s a nightmare’ are increasingly common.

Fortunately they decide that for many the outlook is in fact much brighter.

Previous polling by the RSA found that just 19 percent of the self-employed started up in business to escape unemployment — a finding that is repeated across multiple studies.

If we look at the earnings of the self-employed we again start with a troubling view.

A recent study by the Resolution Foundation found that the average pay packet of the self-employed has barely moved in 20 years, while research by the Social Market Foundation shows that half the self-employed now earn below the National Living Wage. The Family Resources Survey appears to corroborate these findings, showing that the median full-time self-employed worker earns a third less than the typical employee,

But there is again a response in that this may be how many want it.

According to the Understanding Society Survey, the self-employed are nearly just as likely as employees to say they are satisfied with their income

The Financial Times points out that it looks like self-employment earnings are indeed lower than otherwise for some at least if this is any guide.

A new report by the RSA (the Royal Society for the encouragement of Arts, Manufactures and Commerce) confirms this has come with a price tag for the public purse: 18.8 per cent of the self-employed are in receipt of tax credits — payments to low-income working households — versus 10.6 per cent of employees.

The FT takes this further.

One in seven workers is now self-employed but their typical weekly earnings are only about £240 a week, less than they were 20 years ago after adjusting for inflation.

So about half of the official average weekly earnings figure.The Resolution Foundation put it like this last October.

The recovery in earnings over the last year means that they are almost back to levels last seen in the late-1990s at around £240 a week, though this is still 15 per cent down on 1994-95 returns.

Also the RSA point out that as we have discussed on here many times the self-employed are a very diverse bunch to say the least. They identify some 6 sub-groupings or if you prefer they have four more tribes than Frankie goes to Hollywood. They are Visionaries (22%), locals (13%), classicals (11%), survivors (24%), independents (19%) and dabblers (11%).

If we move beyond pay there are of course other differences with the employed.

There is no access to Statutory Maternity Pay should they become pregnant, nor is there recourse to Statutory Sick Pay should they fall ill at work. Recent government moves to establish a National Living Wage and to auto-enrol workers onto a private pension scheme have passed them by. Insecurity is inherent across all the above tribes and is as much a problem for the high-skilled as it is for the low-skilled.

Comment

Back on the 14th of December I looked at the situation of the self-employed via what has become called the gig economy.

In total I did five shifts, and earned an average of £8.10 per hour. The London living wage is supposed to be £9.75, according to London authorities. The national required living wage is £7.20 but goes to £7.50 in April next year.

This was Izabella Kaminska of the FT and as it is often necessary to be critical of that media organisation let us today look at its good side which is research and writing like this. Indeed as today’s self-employment article is by Sarah O’Connor it is a case of lets hear it for the girls (of the FT). But as the RSA reminds us the gig economy is only one sector of the issue although it gets media prominence. We learn that overall the self-employed earn less than the employed often quite a bit less as we wonder if that is why Dr.Weale and others omitted them from the official data series. However we need to add that some prefer it that way although of course some will not.

Oh and the official wage data also omits smaller companies as I pointed out earlier. How is that going? From the RSA.

Equally impressive has been the growth in the number of micro businesses, defined as firms with zero to nine employees. In 2000 there were 3.5m micro businesses in the UK. Today there are closer to 5.2m. While much of the expansion has been driven by one-person firms, the number of micro businesses with employees has also increased. 8.5 million people in the UK now own or are employed in a micro business.

Oh what a difference a couple of days make! It was only on Monday I wrote a post on here entitled ” Will this be seen as the sterling crisis of 2016?” and today we wake up UK time to see the UK Pound just above US $1.24 and at 1.12 versus the Euro. In fact this is not the half of it as the BBC points out.

The pound has dived on Asian markets with automated trading being blamed for the volatility.

At one stage it fell as much as 6% to $1.1841 – the biggest move since the Brexit vote – before recovering to $1.23, still down 1.5%.

It is not clear what triggered the sudden sell-off. Analysts say it could have been automated trading systems reacting to a news report.

There is a fair bit to consider and let me start with the debate over the basic facts as you see that it has also been suggested that the low was US $1.15 you get the idea. We saw this before when the Yen shot higher back in the day that there was considerable doubt to the exact numbers for a while. There are plenty of theories in the media that vary from unlikely to rubbish but Polemic Paine has written a good description of the way the market would have been.

But back to sales. Those that are still on the phone are quoting the reason for the fall on anything that they feel everyone else is saying because no one has a real clue. They will probably repeat what JPMChase or Goldman say as they reckon that the guys there are cleverer than them and more likely to know. So, clients will currently be being told that it is due to- “Barriers being hit at 1.25, 1.20 , and 1.15” and if they can’t even manage that will say “Stop losses”, which is a great generalised term that demands no justification. But some foolish folk will have done a Bloomberg News search for GBP and decided that it is due to the news that fracking had been allowed in North West England. Which is of course rubbish, because we all know that it happened because Diane Abbott was made the shadow Home Secretary.

For my own part I had a wry smile as only yesterday afternoon I was involved in a discussion about Goldman Sachs’ forecasting US $1.20 for the UK Pound which none of us realised was going to take less than 12 hours. My personal experience of such markets and I particularly think of the Italian bond market here is summed up again by Polemic Paine.

First, every salesperson is struggling to call all their clients who had ‘call levels’ at zones never expected to be hit, whilst trying to fill orders in systems at levels that they think they can get away with. Oh, hang on, no they can’t do that anymore as they need audit trails. So, they will all be huddled around spot desks arguing over whose order was hit at what……….Meanwhile, clients will be calling in demanding to know why their stops were done 7% below current market and why no one called them. Because if they had been called they would have bought it back at 8% below current markets because they are all retrospective geniuses.

Back in the days when the BTP ( Italian bond ) market swung wildly there was then a scramble to check stop-loss orders to find invariably that some had been forgotten in the melee. Because trading is now automated they should have been done except were ones that low even entered? Anyway a long day is ahead in dealing rooms just dealing with that and the recriminations. Meanwhile the media will have invented all sorts of stories which may or may not have any truth to them.

The economic impact

Much of this is uncertain and in fact the major initial impact is simply that uncertainty. This is the financial market equivalent of the night after the vote for Brexit as no-one will be exactly sure of what has just happened. However some things we do know as for example the UK Pound had been falling anyway and as I pointed out on Monday.

As we have fallen since then my estimate may now go as high as 1.5% for the boost to annual inflation.

We can add a little more to that if we stay here and of course there will be a boost to output but as I pointed out then it is much more difficult to quantify. This from the Market Purchasing Managers Indices is all we have so far.

rising demand from overseas clients linked to the weak pound sterling…….enjoyed the benefits of a weaker currency.

Another potential impact comes from the fact that due to more fears about inflation as discussed above the UK Gilt market has fallen heavily this morning. This is different to the UK Pound as it has lost some of its gains rather than adding to losses but if we continue like this there are two issues. Firstly the plan for an extended fiscal policy I discussed on the of this month as just got more expensive and secondly we may see some mortgage-rate rises. The prospect of the latter usually causes panic at the Bank of England in the same vein as Gollum in the Lord of the Rings worried about his precious.

To put this into numbers the 10 year Gilt yield has risen to 0.97% and for fiscal purposes the 30 year has risen to 1.68%. Both very low by historical standards but higher than they were.

Where was the Bank of England?

According to the Financial Times the UK Pound fell 6% in 2 minutes so we may ask where was the organisation which claims this?

Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.

It does have the ability to intervene and such a move is a clear case for intervention using this.

the Bank can intervene in support of its monetary policy objective using the Bank’s own resources rather than those of the EEA. (Exchange Equalisation Account).

As it happens it would have closed the position for a profit which is usually the case in such circumstances but not the reason for doing it. Does the Bank of England only work what used to be called gentleman’s hours?

Just as a pointer I have contacted them to say that the foreign reserves system is a mess and need reform. If I ever get a reply I will let you know.

Moving onto the economic position the Bank of England has its hands all over this and consequently a lot of egg on its face. What did it expect when it undertook Open Mouth Operations promising a monetary “sledgehammer”? Also I did point out on Monday that this statement from Dame Nemat Shafik could have been in the script for the film “Dumb and Dumber”

it seems likely to me that further monetary stimulus will be required at some point

Also there is the issue of this from Ben Broadbent of the Bank of England (h/t @LiveSquawk)

If sterling really starts to fall uncontrollably then it could have consequences for monetary policy.

And to be fair this bit turns out to be on the case.

the effect could be coming through faster than we’d anticipated

Having talked the UK Pound lower I suspect the Bank of England will be quiet for a bit or perhaps we will get some more like this from the FT about Governor Carney.

“In the absence of anyone else showing much economic leadership, this gives him a chance to shine,” said one Whitehall official. “He quite likes the media opportunities his current job gives him on the world stage.”

Right now it would involve yet another Forward Guidance U-Turn for him to support the UK Pound on the world stage.

Comment

There has been some economic news today which I will pick up in full detail another time as with markets in panic mode and the US employment report due later they will be ignored. Our persistent trade deficit persists and the small drop in monthly industrial production (0.4%) was more than explained by a fall in oil and gas (0.5%).

When this settles down we will have more idea of the full economic impact but I think John Lennon got it right all those years ago.

It’s been a hard day’s night, and I’d been working like a dog
It’s been a hard day’s night, I should be sleeping like a log

Those long the UK Pound may well have a different tune of his in mind though.

Help, I need somebody
Help, not just anybody
Help, you know I need someone, help

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About the author

I am a freelance economist who studied at the London School of Economics. My speciality was (and still is) monetary economics. I worked in the City of London for several investment banks and then on my own account over a period of 15 years. After initially working in the government bond department at Phillips and Drew Ltd. I moved on into the derivatives arena with options of all types being a speciality. I never lost my specialisation in UK interest rates and also traded as a local on the London International Financial Futures Exchange where I mostly traded futures and options on future and present UK interest rates. So with my specialisations of monetary economics and konwledge of derivatives I have plenty of expertise to deploy on the financial and economic crisis which has unfolded in recent years.

I have also worked in Tokyo Japan again in the derivatives sphere and would particularly recommend Japanese food with a pork tonkatsu box lunch being one of my favourites. My name is Shaun Richards and as well as writing economics reports and analysis I also give speeches and lectures.Should one or all of these be of interest then please contact me via the contact details on this website.

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